CBO Projections Should Spur Action

The Congressional Budget Office (CBO) released projections last week that Concord Coalition Executive Director Robert L. Bixby said confirms that federal finances “are on an unsustainable course that threatens our economic future, risks turmoil in the financial markets, and burdens generations to come with massive amounts of debt.”

Focusing on the next 25 years, CBO says the budget outlook under current law is “daunting” but warns that it is “much bleaker” under an alternative scenario that many analysts consider more realistic.

CBO’s current-law baseline assumes that by 2021 non-defense discretionary spending will be 3.1 percent of GDP, which is lower than it has ever been in the last 50 years. Current law also assumes that the 2001 and 2003 tax cuts will expire, Medicare physician payments will decrease, and Alternative Minimum Tax relief will not be extended.

Because these policies may well change, elected officials should pay close attention to CBO’s “bleaker” scenario. It shows debt rising to above 100 percent of GDP over the next decade. Federal debt would exceed its historical peak of 109 percent by 2023 and approach 190 percent in 2035. Interest costs would become the government’s largest expense.

CBO cautions that the long-term fiscal policies in the two scenarios could have more negative economic impacts than it projects. Under the current-law scenario, increasing debt and higher marginal tax rates could decrease gross national product (GNP) by as much as 2 percent in 2035. Under the alternative scenario with lower marginal tax rates and much higher debt, GNP could be 2 percent to 6 percent lower by 2025 and 7 percent to 18 percent lower by 2035.

The budget office also warns that waiting to close the fiscal gap will make more drastic remedies necessary.